Caterpillar Employees Return – and Now the Bad News
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Picket signs overfill the trash cans. Angry insults and upraised fists are fading memories. There's no joy in Joliet.
Labor lost another battle with Caterpillar management. The new contract froze wages and compressed worker benefits.
Bad news for the Union. But is that bad news for employees? Perhaps a loss for the union is good for people. Losing a little now may be a winning move for shareholders, customers and employees in the long run.
Paychecks resume with an added bonus
The strike is over. International Association of Machinists Local 851 members have punched back into work at the Joliet, Illinois, Caterpillar plant recently. They've been off the clock since April.
The six year contract granted a 3 percent raise for new and lower-paid workers. And each worker will get a $3,100 ratification bonus for returning.
They've got jobs, a bonus - and now the bad news
Older and higher-paid Tier 1 employees have a pay freeze, health care expenses have doubled and pension benefits have been cut with a switch from a defined benefit pension plan to a 401(k) plan.
Such concessions are not unusual when a manufacturer is near bankruptcy. In this case however, Caterpillar has had a great year. Many are complaining that employees should instead be getting raises and increased benefits, that labor should share in the bounty they helped create.
And times are good for industrial machine manufacturers. Caterpillar's (NYSE: CAT) profits increased 78% last year. Deere & Company's (NYSE: DE) earning per share were up 52%. Joy Global's (NYSE: JOY) earnings were up 30%. Astec Industries' (NASDAQ: ASTE) earnings were up up 23%. And CNH Global NV's (NYSE: CNH) earnings were up a whopping 106% last year.
The good times won't last. As we can see from the sorry state of California, ratcheting up benefits and pay when times are good puts cities, states and companies in terrible positions when times turn tough.
In business, the best time to tighten your belt is when sales are good. This improves the company's competitive position, reduces debt and saves resources needed to be competitive when the bad times return.
Corporations are people too
“Corporations are people, my friend,” said Mitt Romney. “Everything corporations earn also goes to people.”
Complaints from political pundits and opposition politicians aside, Romney does have a point. Shareholders really are people. Pension funds, mutual funds and stock dividends go to support mothers, fathers, retirees, widows and orphans.
Dividend checks are important, but not guaranteed. A stronger Caterpillar can retain enough earnings to pay dividends during lean times. As seen in the chart below, Caterpillar kept writing those dividend checks during the depths of the recession.
Consumers love lower prices
The global economy has brought consumers lower prices on nearly all goods and services. Retailers have suffered from squeezed margins as the Costcos and Wal-Marts of the world have cut prices. One adapts or becomes relegated to the dustbin of history.
This price pressure is forced down the food chain from retailer to distributor to manufacturer to equipment supplier. In this global meritocracy where the best value wins, rewarding employees with raises for just showing up to work year after year no longer makes sense.
The moat around North American manufacturers is now filled with container ships. Increasing wages and benefits (just because we always increased wages in the past) doesn't make sense in this new world. Unions need to be open to adjusting wages and benefits both upward and downward to compete in this global market.
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